Termination for Convenience Settlement Costs

When it comes to terminations for convenience in federal government contracting, the staggering statistics of cases filed at the Court of Federal Claims (COFC) should make contractors aware that the government does in fact deny claims in your final settlement proposal.  

Termination for convenience settlement costs become huge disputes primarily because the contractor has spent substantial amount of money and used resources. Common reasons include paying third parites for leases or some other level.

By not understanding laws government termination for convenience settlement costs, companies often find themselves at the litigation stage only to find the laws do not allow for the specific claim.  As a result, government contractors lose thousands of dollars in contract dispute cases.  

By the time the case reaches the appeals stage, the damage is substantially done. An appeals attorney can only try to salvage the situation and recoup and as much of the overall damages as possible.

Important Things to Note with Settlement Termination for Convenience Clause

The following information should make government contractors aware of the dangers with termination for convenience settlement costs when a termination clause is invoked.  

First, government contractors must understand that in a termination for convenience, they bear the burden of proof to show compensable damages directly resulting from the termination. See Jacobs Eng’g Grp., Inc. v. United States, 75 Fed. Cl. 752, 759 (2007).

The scope of damages contractors can recover after the Government invokes a termination for convenience clause is covered by the contract and the FAR terms incorporated therein. This means that:

• You are limited to statutory provisions
• You have to prove your costs to some extent
• Your alleged damages are not always the government’s responsibility

What You Must Demonstrate In Termination for Convenience Settlement Costs

To prevail on a termination for convenience claim during the settlement stage, you must prove that you have suffered an actual injury. See, e.g., Centex Corp. v. United States, 395 F.3d 1283 (Fed. Cir. 2005).  For example, companies cannot seek termination for convenience settlement costs when they have not actually paid out the money. Businesses must also mitigate their damages. They cannot simply sit idle. In a breach of contract case, the innocent party should be placed in the same place that it would have been in had the breach not occurred, but should not be placed in a better position. Bluebonnet Sav. Bank, FSB v. United States, 339 F.3d 1341, 1345 (Fed. Cir. 2003).

Limits on Recoverable Costs

Likewise, when the Government terminates a contract for convenience pursuant to the contract terms (i.e: the termination of convenience clause), the contractor is entitled to recover costs allowed by the contract and FAR clauses incorporated therein, but you should not expect to be placed in a better position than had the contract run its normal course and the termination not transpired. Even if you are attempting to assert that the agency has acted in bad faith, and you are looking to assert breach of contract damages, you simply cannot get a windfall.

• Any attempt to collect more than you would have absent the termination, such damages will be denied by the Court of Federal Claims.
• Settlement costs incurred because of pending litigation are not compensable under the FAR.

Contract Claims for Government’s Failure to Exercise Options

The Federal Circuit has also held that contractors are not entitled to damages based upon the Government’s failure to exercise options where the Government has the discretion to exercise the options. Hi-Shear Tech. Corp. v. United States, 356 F.3d 1372, 1380 (Fed. Cir. 2004). Contractors face the danger of a dismissal if this is the basis for its claims.

You must understand the power of a termination for convenience clause at the beginning stages of the contract award. The government simply has a unilateral right to terminate for convenience when it is in the best interest of the government. The stunning question always becomes “what is an allowable reason for the agency’s termination of a contract”?

Pre-Contract allowable in Termination for Convenience Costs?

There is a difference between direct costs and pre-contract costs. Direct costs must be directly attributable to the performance of the terminated contract. Pre-contract costs are incurred before the contract award “in anticipation of being awarded a contract for the fire season.”

To recover pre-contract costs in a termination for convenience case, a contractor must show that the costs were:

(1) Incurred to meet the contract delivery schedule,

(2) Incurred directly pursuant to the negotiation and in anticipation of the award, and

(3) Would have been allowable if incurred during contract performance.

Penberthy Electromelt Int’l, Inc. v. United States, 11 Cl. Ct. 307, 315 (1986). This is a danger that many contractors face when handling terminations for convenience without an attorney.

Termination Settlement Costs and Proposals

Settlement costs generally are recoverable under FAR 31.205 and include “[a]ccounting, legal, clerical, and similar costs reasonably necessary for . . . . [t]he preparation and presentation, including supporting data, of settlement claims to the contracting officer.” FAR 31.205-42(g)(i).

FAR § 49.206-1(c) provides:

• Convenience settlement proposals must be in reasonable detail and supported by adequate accounting data.
• Actual, standard (appropriately adjusted), or average costs may be used in preparing settlement proposals if they are determined under generally recognized accounting principles consistently followed by the contractor.

Although every receipt is not required, you should always keep track of actual costs in anticipation for a termination for convenience. This is one internal control policy that you should always put into place at the initial award stage.

The FAR allows for the reimbursement of reasonable costs that a contractor incurs to prepare and submit a settlement proposal to a contracting officer following a contract termination. However, the danger is that the time spent for preparation of this level of termination must be in a manner that can be used for audit purposes. It must comply with the requirements of FAR 49.206-1.

Furthermore, to the extent settlement proposal costs were incurred after the commencement of the litigation, the costs are improper because the FAR only provides for termination for convenience settlement costs submitted to the contracting officer. 

Getting professional help can help you to avoid some costly mistakes. Call our experienced government contracts attorneys at 1-866-601-5518 for a free initial consultation.